If you'd like to invest some money in the world's other developed and emerging economies, international exchange-traded funds (ETFs) are a simple solution. These funds, offered by companies like Vanguard, Schwab, and others, invest in foreign companies, which offers you a way to diversify your portfolio in a way that cushions your exposure to geographic risks such as currency fluctuations.
Also, many international economies, particularly those in emerging markets, have high growth potential, and investing in the right international ETFs give you the chance to capitalize on it.
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It's worth mentioning here the distinction between international and global ETFs, as you're likely to see funds describe both ways as you do your research: International ETFs invest in securities outside of the U.S. exclusively, while global ETFs invest in both international and domestic stocks.
3 top international ETFs
If you're looking to diversify your equity holdings beyond the United States, these three ETFs could be smart additions to your portfolio.
1. Vanguard Total International Stock Index Fund ETF
As the name implies, the Vanguard Total International Stock Index Fund ETF invests in a broad array of non-U.S. stocks, including those from both developed and emerging markets. It tracks the FTSE Global All Cap ex-US Index, which includes about 5,800 stocks in more than 45 countries. The fund is highly diversified, and no single company accounts for more than 1.2% of its assets. Top holdings include such household names as Nestle, Samsung Electronics, and Novartis.
2. Schwab International Equity ETF
With a rock-bottom 0.06% expense ratio, the Schwab International Equity ETF is the cheapest international ETF available as of this writing. It tracks the FTSE Developed ex-US index, so unlike the previous fund, its holdings consist only of stocks from developed foreign markets. Its top holdings are roughly the same as those of the Vanguard fund, but because emerging markets are excluded, the fund's holdings are a bit more concentrated, with the top holding accounting for 1.6% of assets. In a nutshell, investors in this ETF give up some diversification, but avoid the potentially volatile emerging markets.
3. Vanguard FTSE Emerging Markets Index Fund ETF
The Vanguard FTSE Emerging Markets Index Fund invests in more than 4,500 different stocks, with its top concentrations in China (29%), Taiwan (16%), India (12%), and Brazil (8%). But as I just mentioned, emerging markets can be quite volatile. After several years of explosive growth in the mid-2000s, they've been rather flat over more recently. As the table above makes clear, this fund has lagged the other two over the past five years.
While you should be prepared for similar periods of slower growth and underperformance in emerging market stocks, there's no denying their long-term potential.
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